Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-21T22:33:17.312Z Has data issue: false hasContentIssue false
  • English
  • Français

The Quest for a Better Legal and Regulatory Framework for Islamic Banking

Published online by Cambridge University Press:  11 December 2014

Abdul Karim Aldohni
Abdul Karim Aldohni*
Affiliation:
Lecturer, Newcastle Law School
Get access Rights & Permissions [Opens in a new window]

Abstract

The legal and regulatory aspects of Islamic banking present a challenge to most financial and regulatory authorities. To many observers, legal and regulatory complexity in this respect stems from the link between the banking business and Islamic law. Compliance with some Islamic rulings forces the sector to operate an unusual business model, which is different from that of their conventional counterparts. After expounding the ideological foundation of Islamic banking and the sector's evolution, this article examines the genesis of the legal and regulatory challenge by conducting a compatibility analysis between Islam and banking. It will be argued that the conceptions of Islam and banking ought not to conflict, which means that achieving regulatory equilibrium in relation to Islamic banking is possible.

Keywords

Islambankingderegulationdeconstructionriskfinancial crisis
Type
Articles
Information
Ecclesiastical Law Journal , Volume 17 , Issue 1 , January 2015 , pp. 15 - 35
Copyright
Copyright © Ecclesiastical Law Society 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

2 According to The Banker's 2009 survey, sharia-compliant assets grew by 28.6 per cent in 2009. Further, the number of conventional banks with sharia windows rose from 163 in 2007 to 191 in 2009. At the same time, the number of sharia-compliant institutions rose from 362 in 2007 to 435 in 2009. See Timewell, S and DiVanna, J, ‘More growth, more challenges’, (2009) The Banker Supplement: Top 500 Islamic Financial Institutions 3–5Google Scholar.

3 Ibid, p 4.

4 It must be noted that a distinction can be made between Islamic banking and Islamic finance. Islamic finance represents the more comprehensive aspect of the industry that includes insurance and Islamic bonds, while Islamic banking has been generally used to refer to the retail aspect of commercial banking. The focus of this article is banking.

5 Sahih Bokhari (one of the nine authenticated Hadith books, Ministry of Islamic Affairs, Endowments, Da‘wah and Guidance, Saudi Arabia), available at <http://hadith.al-islam.com/Display/Display.asp?Doc=1&Rec=6266>, accessed 9 October 2014.

6 Gonthier, C, ‘Law and morality’ (2003) 29 Queen's Law Journal 408–423 at 409Google Scholar.

7 Ibid, p 410.

8 Ibid, pp 410–411.

9 Hallaq, W, An Introduction to Islamic Law (Cambridge, 2009), p 19CrossRefGoogle Scholar.

10 Ibid.

11 Bickenbach, J, ‘Law and morality’, (1989) 8 Law and Philosophy, 291–300 at 291CrossRefGoogle Scholar.

12 Taylor, R, ‘Law and morality’, (1968) 43:4New York University Law Review, 611–650 at 612Google Scholar; Bickenbach, ‘Law and morality’, p 294.

13 Austin, J, The Province of Jurisprudence Determined (London, 1832), p 32Google Scholar.

14 Hart, H, ‘Positivism and the separation of law and morals’, (1958) 71:4Harvard Law Review 593–629 at 597CrossRefGoogle Scholar.

15 Taylor, ‘Law and morality’, p 614.

16 Hart, ‘Positivism’, p 596.

17 The claim of correctness of law has been thoroughly analysed in Alexy, R, ‘On the Thesis of a Necessary Connection Between Law and Morality: Bulygin's Critique’ (2000) 13, 3 Ratio Juris, pp 138–147CrossRefGoogle Scholar.

18 Hallaq, W, Shari'a: theory, practice and transformations (Cambridge, 2009), p 5CrossRefGoogle Scholar.

19 Hallaq, Introduction to Islamic Law, p 20.

20 Qur'an, surah Al-Najm, verses 3–4, ‘Nor does he say [aught] of [his own] desire. It is no less than revelation sent down to him’. For further discussion, see Vogel, F, Islamic Law and Legal System (Leiden, 2000), p 4Google Scholar.

21 Karl, D, ‘Islamic law in Saudi Arabia: what foreign attorneys should know’, (1991) 25:1George Washington Journal of International Law and Economics 131–170 at 138.Google Scholar

22 Al-Zuhayli, W, Financial Transactions in Islamic Jurisprudence: volume 1, trans El-Gamal, M, rev M Eissa (Damascus, 2003), p 320Google Scholar.

23 M El-Gamal, ‘An economic explication of the prohibition of Ribā in classical Islamic jurisprudence’, 2001, p 4, available at <http://www.ruf.rice.edu/~elgamal/files/riba.pdf>, accessed 8 October 2014.

24 Qur'an, surah Al-Baqarah, verse 2:219.

25 Al-Zuhayli, Financial Transactions, p 83.

26 Minwer, L, ‘Middle East: Islamic models of equity markets’, (2000) 21:5Company Lawyer 161–164 at 162Google Scholar.

27 This description has been suggested by the scholar Al-Sarakhsy and it has been adopted by most jurisprudents, such as Al-Sarakhsy, Al-Mabsout, XIII/194, cited in Siddiq Mohammad Al-Ameen Al-Dhareer, Al-Gharar in Contracts and its Effects on Contemporary Transactions, Eminent Scholars Lecture Series No 16 (Jeddah, 1997), p 10Google Scholar.

28 Qur'an, surah Al-Baqarah, verse 2:279.

29 Iqbal, M and Molyneux, P, Thirty Years of Islamic Banking, History, Performance and Prospects (London, 2005), p 36Google Scholar.

30 Wilson, R, ‘Islamic banking and its impact on the international financial scene’, (1995) 10:10Journal of International Banking Law, 437–445 at 437Google Scholar.

31 Bedlawi, H, The Arab Gulf Economy in a Turbulent Age (New York, 1984), p 13Google Scholar.

32 Klemke, E, ‘On the alleged inseparability of morality and religion’, (1975) 2 Religious Studies 37–48 at 43CrossRefGoogle Scholar.

33 See note 4 above.

34 Firth, R, Religion: a humanist interpretation (London, 2004), p 15Google Scholar.

35 Balkin, J, ‘Deconstructive practice and legal theory’, (1987) 97 Yale Law Journal 743–786 at 763–764CrossRefGoogle Scholar.

36 Cerny, P, ‘The deregulation and re-regulation of financial markets in a more open world’ in Cerny, P (ed), Finance and World Politics: markets, regimes and states in the post-hegemonic era (Cheltenham, 1993), pp 51–85 at p 52Google Scholar.

37 Helleiner, E, ‘Explaining the globalisation of the financial markets: bringing states back in’, (1995) 2:2Review of International Political Economy 315–341 at 317CrossRefGoogle Scholar.

38 Canova, T, ‘The transformation of U.S. banking and finance: from regulated competition to free-market receivership’, (1995) 60:4Brooklyn Law Review, 1295–1354 at 1299Google Scholar.

39 Preston, H, ‘The Banking Act of 1933’, (1933) 23:4American Economic Review 585–607 at 590Google Scholar.

40 E Helleiner, ‘When finance was the servant: international capital movement in the Bretton Woods order’ in Cerny, Finance and World Politics, pp 20–48 at p 22.

41 Helleiner, ‘Explaining the globalisation of the financial markets’, p 318.

42 The Euromarket was based in London and it allowed international financial operations to be conducted freely (to a certain extent). As transactions were made mainly in US dollars without any restrictions imposed by the UK, the US also needed to allow American banks and corporations to participate in the market without restricting the flow of dollars into the Euromarket. See ibid, p 320.

43 Ibid, p 328.

44 Cerny, ‘Deregulation and re-regulation of financial markets’, p 59.

45 Ibid, p 55.

46 For more discussion on the 2008 financial crisis, its origins and causes, see Coffee, J Jr, ‘What went wrong? An initial inquiry into the causes of the 2008 financial crisis’, (2009) 9:1Journal of Corporate Law Studies 1–22CrossRefGoogle Scholar; Acharya, V and Richardson, M, ‘Causes of the financial crisis’, (2009) 21:2–3Critical Review: A Journal of Politics and Society 195–210CrossRefGoogle Scholar.

47 International Monetary Fund, ‘World economic outlook: crisis and recovery’, April 2009, p 106, <http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm>, accessed 9 October 2014.

48 Tabarrok, A, ‘The separation of commercial and investment banking: the Morgans vs. the Rockefellers’, (1998) 1:1Quarterly Journal of Austrian Economics 1–18 at 7CrossRefGoogle Scholar.

49 HM Treasury, ‘Banking crisis: dealing with the failure of the UK banks’ (Seventh Report of Session 2007–2008).

50 A Woodcock, ‘Only Lib Dems offer real change, says Nick Clegg’, The Independent, 20 April 2010, <http://www.independent.co.uk/news/uk/politics/only-lib-dems-offer-real-change-says-nick-clegg-1949207.html>, accessed 10 October 2014.

51 Rahman, F, Islam and Modernity: transformation of an intellectual tradition (Chicago, IL, 1982), pp 20–21Google Scholar.

52 Schacht, J, The Origins of Muhammadan Jurisprudence (Oxford, 1950), pp 6–9Google Scholar.

53 Presley, J and Sessions, J, ‘Islamic economics: the emergence of a new paradigm’, (1994) 104:424Economic Journal 584–596 at 585CrossRefGoogle Scholar.

54 Qur'an, surah Al-An'am, verse 6:165.

55 Knight, F, Risk, Uncertainty and Profit (reprint, New York, 1964)Google Scholar.

56 Ibid, pp 202, 204–206.

57 Ibid, pp 224, 217 and 225, for the respective types. On a priori probabilities, see also LeRoy, S and Singell, L Jr, ‘Knight on risk and uncertainty’, (1987) 95:2Journal of Political Economy 394–406 at 397CrossRefGoogle Scholar.

58 LeRoy and Singell, ‘Knight on risk and uncertainty’, p 397.

59 Holton, G, ‘Defining risk’, (2004) 60:6Journal of Financial Analysts 19–25 at 20CrossRefGoogle Scholar.

60 Gray, J, ‘Risk, regulation and the common law: lessons from the BCCI litigation – part 1’, (2008) 2:4Law and Financial Markets 351–361 at 351CrossRefGoogle Scholar.

61 O'Malley, P, Risk, Uncertainty and Governance (London, 2004), pp 18Google Scholar, 20.

62 Holton, ‘Defining risk’, p 22.

63 The Islamic Financial Services Board, ‘Guiding principles of institutions (other than insurance institutions) offering only Islamic financial services’, December 2005, p 26, available at <http://www.ifsb.org/standard/ifsb1.pdf>, accessed 11 October 2014.

64 [2009] EWHC 3545 (Ch).

65 McCormick, R, Legal Risk in the Financial Markets (Oxford, 2006), p 16Google Scholar.

66 Bank of International Settlement, Basel Committee on Banking Supervision, ‘International governance of capital standards: a revised framework, comprehensive vision’ (Basel II), June 2006, p 144, available at <http://www.bis.org/publ/bcbsca.htm>, accessed 9 October 2014.

67 Ibid, p 144, n 97.

68 Shyamala Gopinath, Deputy Governor of the Reserve Bank of India, inaugural address, ‘Changing dynamics of legal risks in the financial sector’ symposium, 30 October 2009, <www.bis.org/review/r091105c.pdf>, accessed 9 October 2014.

69 D Sawyer and J Trundle, ‘Core principles for systemic important payment systems’, in Bank of England, Financial Stability Review, June 2000, p 129.

70 Bank of England, ‘Oversight of payment systems’, November 2000, p 10.

71 McCormick, Legal Risk, p 107.

72 Gopinath, ‘Changing dynamics of legal risks’.

73 This particular aspect of the legal risk can be seen in two cases, Islamic Investment Company of the Gulf v Symphony Gems NV & Ors 2002 WL 346969 (QBD(Com Ct)) and Shamil Bank of Bahrain v Beximco Pharmaceuticals Limited and others [2003] EWHC 2118 (Comm). The decision of the Court of Appeal in this case is found at [2004] EWCA Civ 19.

74 Wilson, R, ‘Challenges and opportunities for Islamic banking and finance in the West: the United Kingdom experience’, (1999) 41:4–5Thunderbird International Business Review 421–444 at 426–427CrossRefGoogle Scholar.

75 HC Deb 28 April 1993,vol 223, col 398.

76 J Gapper, ‘UK acts against Islamic bank’, Financial Times, 1 April 1993, p 22.

77 See HC Deb 28 April 1993,vol 223, col 398.

78 Ibid.